Compensation Management Explained With Meaning, Importance, Objectives, and More

Compensation management is an essential process of attracting and retaining the best workforce an organisation needs to compete in today’s competitive business landscape. Learn more.

According to Gallup, replacing an employee costs twice their salary. Today, in the post-pandemic era, attrition rates are soaring globally. Burnout, non-transparent communication, less base pay, etc., are some reasons highlighted in the recent Work Institute’s Retention Report. 

Compensation is a small yet significant reason for employee turnover or shortage, if not the whole. To a large degree, it is the pay that not only motivates and retains existing employees but also helps attract newer talents. At the same time, the organisation must also benefit financially and must have the top talents for sustained growth. This is where the human resources department is responsible for compensation management. 

What is Compensation Management?

Compensation management refers to determining the most appropriate pay to the employee in exchange for their work. It is both strategic and administrative where the salary, incentives/benefits of each employee in the organisation need to be identified and managed. 

Read more: What is HR Management?

Compensation management ensures that employee’s salary and benefits are competitive. Otherwise, it increases the chances of employees looking for better pay packages in a different organisation. Fair pay and greater monetary value not only retains or attracts employees but also increases productivity in the workforce. Or in other words, it plays an important role in employee motivation. 

Compensation Management Process

Compensation management, in a nutshell, is guided by the following elements. 

1. Compensation – It includes salary, benefits, bonuses, rewards and recognition, etc. 
2. Organisational and Market Data – Company budget, employee performance, market research, corporate regulations and policies, etc., are part of such data
3. Tools – Budgeting, forecasting, etc 

The compensation management process involves the following. 

Outlining the Compensation Goal 

The compensation strategy varies from one organisation to another. But it should be competitive enough to attract and retain the best talent. Understanding the market/business environment is key to strategise how the company can offer competitive salaries with benefits. 

An organisation’s strategy planning must involve compensation. It is also important to check the financial situation of the company beforehand. 

Explore: What is business strategy?

Creating a Compensation Policy

Once the strategy is aligned with compensation, it is time to create policies regarding the way employees will receive compensation. Policies such as paid leaves, healthcare benefits, etc., need to be created in compliance with current standards. Here, HR managers need to work with top-level management.  

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Considering Influencing Factors

Cost of living, what competitors pay, industry growth rate, skill required for the role, whether skills are in demand, etc., are external factors affecting compensation management. The internal factors include seniority of employees, performance of the employee, employee expectations, etc. 

All of these factors affecting compensation management should be analysed. 

Implementing the Compensation Plan

After the compensation plan is finalised by senior management, it is time to implement it. It should be communicated to employees.

Monitoring and Revising Compensation

Once the compensation plan is implemented, it is necessary to review it periodically. If the compensation plan is not contributing to improved productivity, it should be revised.

Objectives of Compensation Management

Here are some objectives of compensation management. 

Acquiring the Best Talent

The more competitive the compensation is, the higher the chance is of finding suitable talent with the top skills. 

Retaining Employees

The market value of designations should be reviewed time to time so that the organisation is paying the personnel the right salary with benefits. Some organisations even have provisions where employees are compensated based on their performance. 

Offering Motivation

With pay equity among similar roles in an organisation, employees become more motivated. When there is a tangible pay raise, the employee feels more secure. 

Being Compliant

Compliance with national or state laws regarding labour saves companies from potential future lawsuits. Compliance also means offering the same or more compensation within the industry that demands similar roles. 

Improving Returns

With a full-proof compensation plan that is monitored and re-evaluated from time to time, an organisation’s returns increase. The goal is to hire the best employees, retain and motivate them.  

Importance of Compensation Management

Compensation management is a crucial area that determines the growth of an organisation in many ways.

One is that it can reduce turnovers, leading to an improved employee retention and overall reputation of the business. 

Secondly, the organisation benefits by acquiring the best talent who are motivated to provide more output. 

Average compensation in a dynamic business environment creates a loop where employees work for a year or two in a company and then leave, only to find better options. That way, the company which provides average pay is likely to suffer high turnovers. Also, the tenure of the employee is likely to be unproductive, affecting the returns negatively. 

Parting Thoughts

It is important to know that compensation is not just about salary. It includes health benefits, travel and house rent allowances, bonuses, profit options, etc. Above average compensation has more benefits than meets the eye, or in this case, more cost savings for the organisation with the best workforce that does not want to leave.